November 2023

In its February 2023 portfolio letter, the FCA indicated that it was reviewing fund managers' compliance with its guiding principles for authorised funds. It has now published the findings of the review — noting that although fund managers have made efforts to comply with the principles, a range of improvements are still needed.

The findings illustrate the importance of clear disclosures that can be understood by consumers, effective and measurable stewardship, robust governance, and the importance of ensuring all aspects of a fund are consistent with its name and any sustainability claims.

Given the close links to the FCA's Consumer Duty, and the anticipated publication of its Sustainability Disclosure Requirements (SDR) imminently (which will codify aspect of the principles), this is a timely publication. Fund managers should act quickly on the findings to inform their Consumer Duty 'Day 2' activities (see relevant article here) and to support preparations to implement the SDR (see an implementation guide here).


The guiding principles were originally communicated in a 'Dear Chair' letter (PDF 283KB) to Authorised Fund Managers (AFMs) in July 2021, targeting funds with an ESG/sustainable investment strategy or those that claim to have ESG characteristics, themes or outcomes.

Absent implementation of the EU SFDR, and prior to the implementation of TCFD disclosures for UK asset managers, the FCA seized the opportunity to lay down a marker with its expectations for UK firms managing retail funds. The principles consist of an overarching principle on consistency, and three specific principles (design, delivery and disclosure).

Summary of the FCA's findings

Having reviewed authorised funds with a reference to ESG and/or sustainability terms in their name across 12 AFMs, the FCA found some evidence of good practice but noted that the principles had not been fully embedded. The key findings for ESG and sustainable funds are as follows: 


FCA stated good practice

Observed poor practice


  • Scoring systems / benchmarks: Are used and are suited to the fund
  • Stewardship: 
    • Stewardship activity is embedded in investment teams, supported by central resource
    • Active engagement policies and initiatives with investee companies, alongside effective use of voting
    • The outcomes of stewardship activity are measured and recorded, and it is explained how this furthers the fund’s objectives
  • Fund objectives: Failure to set any specific ESG/sustainability objectives (in addition to financial objectives) where funds have ESG/sustainable terms in their names. Setting a wide range of objectives but only committing to achieving one
  • Stewardship:
    • Disclosures do not sufficiently explain the firm’s stewardship approach
    • Inability to demonstrate how outcomes are set, assessed and monitored, and how these link to the investment objectives of funds


  • Asset research and due diligence: Thoroughly embedded in the investment process
  • Data providers: Robust due diligence of third parties is carried out and used to inform disclosures and reporting
  • Systems & controls: Ongoing maintenance to ensure data accuracy, compliance with methodologies, and to identify third party data errors
  • Holdings: Holdings appear inconsistent with the fund’s ESG/sustainability objectives
  • Transition investments: In some cases, the AFM’s documentation did not explain the absence of a Scope 3 emissions1 target for underlying issuers in the fund literature, and the overall treatment of the holdings was not clear


  • Clarity: Clear explanation of what the fund is designed to offer and how performance is measured
  • Benchmarks used: The methodology, limitations and data used are made clear
  • Consumer testing: Firms test how the fund’s ESG/sustainability features are understood by investors, gather data on website usage, and use this to inform ongoing disclosures
  • Cross referencing: Links are clear and used effectively



  • Failure to explain key features: e.g. disclosing some emissions data but not mentioning that Scope 3 emissions are omitted.
  • Transition funds: Failure to explain that emissions may be greater than for non-ESG/sustainable funds
  • Product-level detail: Very little detail on ESG/sustainability policy goals
  • Firm vs fund disclosures: Insufficient alignment between entity- and fund-level disclosures, and incoherent or out of date links
  • Navigating disclosures: Information in supplementary reports not displayed as prominently as the factsheet, or not displayed where it would be expected


  • Product governance: Governance structures enable risks to be identified, monitored and reported
  • Objective and policy monitoring: Ongoing, with exceptions, key risks and issues reported to committees, overseen by the board
  • MI: Objectives are effectively monitored in product governance arrangements
  • Policies and procedures: Are in place and embedded with relevant staff
  • MI and records: Lack of records to evidence key decisions, their rationale, and any challenge. This was a particular challenge for older funds, including funds that had been adjusted post-launch to incorporate ESG/sustainability objectives or policies


Crucially, there are Consumer Duty implications across all the findings. The FCA notes that the 'consumer understanding' outcome is particularly relevant (especially around testing whether communications meet the needs of retail customers). AFMs should also revisit the robustness of their product governance arrangements, and ensure relevant MI and data is captured in reporting to committees and the board (see a guide to the Consumer Duty board report here).

Next steps for Authorised Fund Managers

AFMs should act quickly to review their arrangements and assess them against the FCA's findings. Specifically, this should include reviewing their:

  1. Governance structures and oversight arrangements: with a focus on the prevention of greenwashing. 
  2. Stewardship operating model: including arrangements for setting the stewardship programme, the involvement of relevant functions including portfolio management and research, and tools for recording, tracking and monitoring engagement activity (see a broader summary of considerations for firms here). Firms with a centralised stewardship function will need to address specific challenges when responding to the FCA's comments. 
  3. Sustainable product framework: focusing on whether it sets clear minimum standards aligned to the guiding principles and is appropriately linked to the firm's broader ESG strategy. 
  4. Approach to product-level sustainability disclosures: with an emphasis on whether disclosures for ESG products are consistent and easy to find and navigate.
  5. Sustainable investment framework: to ensure there is a robust approach to assessing the eligibility of investee companies as investments in ESG funds, including assessing transition investments. 

The outcome of these reviews should be documented and approved by the AFM's relevant committee(s), and ultimately the board.

Taking these steps should support firms' alignment with the Consumer Duty, but importantly should also assist preparations to implement the SDR regime. Given the SDR policy statement is due imminently, any work undertaken in the short term should also support compliance with the FCA's anti-greenwashing rule that takes effect on publication of the policy statement.

Contact us

KPMG in the UK has a dedicated Wealth and Asset Management practice with relevant ESG and sustainability expertise and experience that can assist you with complying with both the guiding principles and implementing the SDR regime. If you need assistance, please get in touch. 

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1 Scope 3 emissions are indirect emissions that occur in the value chain (excluding Scope 2 emissions), including upstream and downstream emissions.